QUESTION: WITH USE OF RELEVANT EXAMPLES EXAMINE VARIOUS STRATEGIES

OF ENTERPRISE GROWTH SHOWING ADVANTAGES OF EACH WITH CLEAR

REFERENCES.
SOLUTION
WHAT IS BUSINESS GROWTH?
Simply stated, business growth means an increase in the size or scale of operations of a firm
usually accompanied by increase in its resources and output.
This are the various things such as increase in the total sales volume per annum, an increase in
the production capacity, increase in employment, an increase in production volume , an
increase in the use of raw material and power. They indicate growth but do not provide a
specific meaning of growth.
NEED FOR GROWTH
Growth is precondition for the survival of a business firm. An enterprise that does not grow
may, in course of time have to be closed down because of its obsolete products. i.e. pagers
company closed due to introduction of cell phones.
Reasons for growth include:
Survival: due to the companies dorminating and introducing monopoly and
monopolistic markets its vita for the companies to grow tentatively increasing their
chance of survival.
Economies of Scale: Growth of a firm may provide several economies in production,
purchasing, marketing, finance, management.
Owners mandate: Capable management may on its own like to take carefully
calculated risk and expand the size of the company.
Expansion of the market Business firms grow to meet the increasing demand.
Expanding markets provide opportunity for business growth.
Latest Technology Some business firms invest in research and development activities
to create new products and new techniques others try to acquire latest technology from
the market.
Prestige and Power The more the size of the business firm increase the more is the
prestige and power of the firm.
Self-sufficiency Some firms grow to become self sufficient in terms of marketing of
raw material or marketing of products. Growth in either or both of these forms reduces
the dependency of the firm over other firms.
WHAT IS GROWTH STRATEGY
Growth Strategy refers to a strategic plan formulated and implemented for expanding firms
business. For smaller businesses, growth plans are especially important because these
businesses get easily affected even by smallest changes in the marketplace. Changes in
customers, new moves by competitors, or fluctuations in the overall business environment can
negatively impact their cash flow in a very short time frame.
TYPES OF GROWTH STRATEGIES
The following are the main growth strategies available to firms:
1. Intensive Growth Strategy (Expansion)
2. Diversification
3. Modernization
4. Mergers
5. Joint Ventures
1) INTENSIVE GROWTH STRATEGY
Intensive growth strategy or expansion involves raising the market share, sales revenue and
profit of the present product or services. The firm slowly increases its production and so it is
called internal growth strategy. It is a good strategy for firms with a smaller share of the
market. Three alternative strategies are available in this regard.
These are:
(a) Market Penetration: This strategy aims at increasing the sale of present product in the
presented market through aggressive promotion.
(b) Market Development : It implies increasing sales by selling present products in the new
markets. For example selling electronic goods in rural areas or sale of chocolates to middle aged
and old persons.
(c) Product Development: In this, the firm tries to grow by developing improved products for
the present market. For example, A.C. with remote control.
Advantages
Growth is slow and natural. Therefore, it can be handled easily.
Capital required for expansion can be taken from the firm's own funds.
Existing resources can be better utilized
The growing firm is in a better position to face competition in the market.
Only a few changes are required in the organisation and management systems of
business.
Expansion provides economics of large-scale operations.
Limitations
Growth is very slow and it takes a long time for growth to actually happen.
A business firm loses the possibility of exploiting many business opportunities by
restricting its operations to the present products and markets.
It is not always possible to grow in the present product market.
2) DIVERSIFICATION
Diversification is a much talked about and widely used strategy for growth. Many companies
have opted for this. For example, LIC, an insurance concern initially, diversified into mutual
funds. State Bank of India diversified into merchant banking and mutual funds. Similarly, Larsen
and Toubro, an engineering company diversified into cement.
Situations that may lead to diversification
When diversification promises greater profitability than expansion.
When the firm cannot attain its growth target by the strategy of expansion alone.
When the financial resources of the firm are much in excess of the requirements of
expansion.
Advantages
Better use of its resources. By adding up related products to its existing product
portfolio, a company can more effectively utilize its managerial personnel, marketing
network, research and development facilities.
Reduce the decline in sales. By developing new products the sales revenue and earnings
can be maintained or even increased.
More competitive With greater resources, more products and higher profits, the
diversified firm is more competitive than a single product firm.
Minimize risk. When one line of business faces recession, another line may be in high
growth stage. For example, a well-diversified engineering firm like Larsen and Toubro
did well even when the engineering industry was facing recession.
Use of cash surplus of one business to finance another business having good potential
for growth.
Economies of scale Diversification adds to size of business which improves the
competitiveness of a firm. It offers a lot of economy in operations because common
facilities can be used for several products.
Limitations
Huge funds are required for diversification. The internal savings of the business may not
be sufficient to finance growth.
(ii) The functions and responsibilities of top executives increase because of need to
handle new product, technology and markets. They may find problems in coordination
which may lead to inefficient operations.
(iii) Diversification may involve new technology and new markets and the present staff
may face problems in adjusting to this growth pattern.
(iv) Diversification may lead to unknown products and markets leading to more risk.
Types of Diversification
Horizontal Integration.
Vertical Integration.
Concentric.
Conglomerate.
Horizontal Integration: involves addition of parallel new products to the
existing product line. This may happen internally or externally, internally, a company may
decide to enter a parallel product market in addition to the existing product line.
Externally, a company combines with a competing firm.
Vertical Integration: In vertical integration new products or services are added which are
complementary to the present product line or service. New products fulfill the firms own
requirements by either supplying inputs or by serving as a customer for its output. In vertical
integration the firm moves backward or forward from the present product or service.
Concentric Diversification: When a firm diversifies into some business which is related with its
present business in terms of marketing, technology, or both, it is called concentric
diversification. When in concentric diversification new product or service is provided with the
help of existing or similar technology it is called technology-related concentric diversification.
Conglomerate Diversification: When a firm diversifies into business which is not related to its
existing business both in terms of marketing and technology it is called conglomerate
Diversification
3) MODERNISATION
A firm may use the strategy of modernization to achieve growth. Modernization basically
involves upgradation of technology to increase production, to improve quality and to reduce
wastages and cost of production. The worn-out and obsolete machines and equipment are
replaced by the modern machines and equipment.
Implications
A firm may go for modernization at a low pace to maintain its position in the market.
Thus, it may be considered a stability strategy.
Modernization may be used with full strength to achieve internal growth. Thus, it is used
as an internal growth strategy.
Advantages
Modernization improves the productivity and efficiency of the firm.
The profitability of the firm goes up because of increased efficiency and reduced
wastages.
It makes available better quality products to the customers.
The firm becomes more competitive in the long-run because of modernization.
The growth is systematic and does not affect the normal functioning of the firm.
The workers acquire modern skills because of which their wages go zup.
Limitations
The accumulated savings of the business may not be sufficient to Finance modernization
of plant and machinery.
The responsibilities of top executives would increase because of need to handle new
product, technology and markets.
The existing staff may face problems in adapting to the new technology.
4) MERGER
When different companies combine together into new corporate organizations, such a process
is known as mergers.
Merger can occur in two ways:
Acquisition of takeover
Amalgamation.
Takeover or acquisition takes place when a company offers cash or securities in exchange for
the majority shares of another company. It involves one company taking over control of
another.
Amalgamation takes place when two or more companies of equal size or strength formally
submerge their corporate identities into a single one in a friendly atmosphere.
Advantages
A merger provides economies of large-scale operations.
Better utilization of funds can be made to increase profits.
There is possibility of diversification.
More efficient use of resources can be made.
Sick firms can be rehabilitated by merging them with strong and efficient concerns.
It is often cheaper to acquire an existing unit than to set up a new one.
It is possible to gain quick entry into new lines of business.
It can provide access to scarce raw materials and distribution network and managerial
expertise.
Disadvantages
The combined enterprise may be unwieldy. Effective co-ordination and control becomes
difficult. As a result efficiency and profitability may decline.
Mergers give rise to monopoly and concentration of economic power which often
operate against the interest of the society and the country.
5) JOINT VENTURE
When two or more firms mutually decide to establish a new enterprise by participating in
equity capital and in business operations, it is known as joint venture. A joint venture is a
business partnership between two or more companies for a specific business operation.
Joint venture can be with a firm in the same country or a foreign country.
REFERENCES
Alternative growth strategies for small business by Sonia Sabharwal